Intrinsic value of Northrop Grumman - NOC

Previous Close

$272.82

  Intrinsic Value

$368.54

stock screener

  Rating & Target

buy

+35%

  Value-price divergence*

+84%

Previous close

$272.82

 
Intrinsic value

$368.54

 
Up/down potential

+35%

 
Rating

buy

 
Value-price divergence*

+84%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of NOC stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 47.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  4.17
  5.20
  5.18
  5.16
  5.15
  5.13
  5.12
  5.11
  5.10
  5.09
  5.08
  5.07
  5.06
  5.06
  5.05
  5.05
  5.04
  5.04
  5.03
  5.03
  5.03
  5.02
  5.02
  5.02
  5.02
  5.02
  5.01
  5.01
  5.01
  5.01
  5.01
Revenue, $m
  24,508
  25,782
  27,118
  28,518
  29,985
  31,524
  33,137
  34,829
  36,604
  38,466
  40,419
  42,468
  44,618
  46,874
  49,242
  51,726
  54,334
  57,071
  59,943
  62,959
  66,124
  69,446
  72,933
  76,594
  80,438
  84,472
  88,708
  93,155
  97,824
  102,725
  107,871
Variable operating expenses, $m
 
  22,340
  23,433
  24,578
  25,779
  27,038
  28,358
  29,742
  31,195
  32,718
  34,316
  34,747
  36,507
  38,353
  40,290
  42,323
  44,456
  46,695
  49,046
  51,513
  54,102
  56,821
  59,674
  62,670
  65,814
  69,115
  72,581
  76,219
  80,039
  84,050
  88,260
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  21,315
  22,340
  23,433
  24,578
  25,779
  27,038
  28,358
  29,742
  31,195
  32,718
  34,316
  34,747
  36,507
  38,353
  40,290
  42,323
  44,456
  46,695
  49,046
  51,513
  54,102
  56,821
  59,674
  62,670
  65,814
  69,115
  72,581
  76,219
  80,039
  84,050
  88,260
Operating income, $m
  3,193
  3,442
  3,685
  3,940
  4,206
  4,486
  4,779
  5,087
  5,410
  5,748
  6,103
  7,721
  8,112
  8,522
  8,952
  9,404
  9,878
  10,375
  10,898
  11,446
  12,021
  12,625
  13,259
  13,925
  14,624
  15,357
  16,127
  16,936
  17,784
  18,675
  19,611
EBITDA, $m
  3,649
  4,804
  5,053
  5,314
  5,587
  5,874
  6,175
  6,490
  6,821
  7,167
  7,531
  7,913
  8,314
  8,734
  9,175
  9,638
  10,124
  10,634
  11,169
  11,731
  12,321
  12,940
  13,590
  14,272
  14,988
  15,740
  16,529
  17,358
  18,228
  19,141
  20,100
Interest expense (income), $m
  0
  247
  284
  323
  364
  406
  451
  498
  547
  599
  653
  709
  769
  832
  897
  966
  1,038
  1,114
  1,194
  1,277
  1,365
  1,457
  1,553
  1,655
  1,761
  1,873
  1,990
  2,113
  2,242
  2,378
  2,521
Earnings before tax, $m
  2,923
  3,195
  3,401
  3,617
  3,843
  4,080
  4,328
  4,589
  4,863
  5,149
  5,450
  7,011
  7,343
  7,690
  8,055
  8,438
  8,840
  9,261
  9,704
  10,169
  10,657
  11,169
  11,706
  12,270
  12,863
  13,484
  14,137
  14,822
  15,542
  16,297
  17,090
Tax expense, $m
  723
  863
  918
  976
  1,038
  1,102
  1,169
  1,239
  1,313
  1,390
  1,472
  1,893
  1,982
  2,076
  2,175
  2,278
  2,387
  2,501
  2,620
  2,746
  2,877
  3,016
  3,161
  3,313
  3,473
  3,641
  3,817
  4,002
  4,196
  4,400
  4,614
Net income, $m
  2,200
  2,333
  2,483
  2,640
  2,805
  2,978
  3,160
  3,350
  3,550
  3,759
  3,979
  5,118
  5,360
  5,614
  5,880
  6,160
  6,453
  6,761
  7,084
  7,423
  7,779
  8,153
  8,545
  8,957
  9,390
  9,844
  10,320
  10,820
  11,346
  11,897
  12,476

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,541
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  25,614
  24,277
  25,535
  26,853
  28,235
  29,683
  31,203
  32,796
  34,467
  36,220
  38,059
  39,989
  42,013
  44,138
  46,367
  48,707
  51,162
  53,739
  56,444
  59,283
  62,263
  65,392
  68,675
  72,123
  75,742
  79,541
  83,529
  87,717
  92,113
  96,728
  101,573
Adjusted assets (=assets-cash), $m
  23,073
  24,277
  25,535
  26,853
  28,235
  29,683
  31,203
  32,796
  34,467
  36,220
  38,059
  39,989
  42,013
  44,138
  46,367
  48,707
  51,162
  53,739
  56,444
  59,283
  62,263
  65,392
  68,675
  72,123
  75,742
  79,541
  83,529
  87,717
  92,113
  96,728
  101,573
Revenue / Adjusted assets
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
  1.062
Average production assets, $m
  3,326
  3,506
  3,688
  3,878
  4,078
  4,287
  4,507
  4,737
  4,978
  5,231
  5,497
  5,776
  6,068
  6,375
  6,697
  7,035
  7,389
  7,762
  8,152
  8,562
  8,993
  9,445
  9,919
  10,417
  10,940
  11,488
  12,064
  12,669
  13,304
  13,971
  14,670
Working capital, $m
  1,226
  -1,392
  -1,464
  -1,540
  -1,619
  -1,702
  -1,789
  -1,881
  -1,977
  -2,077
  -2,183
  -2,293
  -2,409
  -2,531
  -2,659
  -2,793
  -2,934
  -3,082
  -3,237
  -3,400
  -3,571
  -3,750
  -3,938
  -4,136
  -4,344
  -4,562
  -4,790
  -5,030
  -5,282
  -5,547
  -5,825
Total debt, $m
  7,058
  8,116
  9,225
  10,387
  11,606
  12,884
  14,224
  15,629
  17,103
  18,649
  20,271
  21,973
  23,759
  25,632
  27,599
  29,662
  31,828
  34,101
  36,487
  38,991
  41,619
  44,378
  47,275
  50,315
  53,507
  56,858
  60,376
  64,069
  67,946
  72,017
  76,291
Total liabilities, $m
  20,355
  21,413
  22,522
  23,684
  24,903
  26,181
  27,521
  28,926
  30,400
  31,946
  33,568
  35,270
  37,056
  38,929
  40,896
  42,959
  45,125
  47,398
  49,784
  52,288
  54,916
  57,675
  60,572
  63,612
  66,804
  70,155
  73,673
  77,366
  81,243
  85,314
  89,588
Total equity, $m
  5,259
  2,865
  3,013
  3,169
  3,332
  3,503
  3,682
  3,870
  4,067
  4,274
  4,491
  4,719
  4,958
  5,208
  5,471
  5,747
  6,037
  6,341
  6,660
  6,995
  7,347
  7,716
  8,104
  8,510
  8,938
  9,386
  9,856
  10,351
  10,869
  11,414
  11,986
Total liabilities and equity, $m
  25,614
  24,278
  25,535
  26,853
  28,235
  29,684
  31,203
  32,796
  34,467
  36,220
  38,059
  39,989
  42,014
  44,137
  46,367
  48,706
  51,162
  53,739
  56,444
  59,283
  62,263
  65,391
  68,676
  72,122
  75,742
  79,541
  83,529
  87,717
  92,112
  96,728
  101,574
Debt-to-equity ratio
  1.342
  2.830
  3.060
  3.280
  3.480
  3.680
  3.860
  4.040
  4.210
  4.360
  4.510
  4.660
  4.790
  4.920
  5.040
  5.160
  5.270
  5.380
  5.480
  5.570
  5.660
  5.750
  5.830
  5.910
  5.990
  6.060
  6.130
  6.190
  6.250
  6.310
  6.370
Adjusted equity ratio
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118
  0.118

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,200
  2,333
  2,483
  2,640
  2,805
  2,978
  3,160
  3,350
  3,550
  3,759
  3,979
  5,118
  5,360
  5,614
  5,880
  6,160
  6,453
  6,761
  7,084
  7,423
  7,779
  8,153
  8,545
  8,957
  9,390
  9,844
  10,320
  10,820
  11,346
  11,897
  12,476
Depreciation, amort., depletion, $m
  456
  1,362
  1,368
  1,374
  1,381
  1,388
  1,395
  1,403
  1,411
  1,419
  1,428
  193
  202
  212
  223
  234
  246
  259
  272
  285
  300
  315
  331
  347
  365
  383
  402
  422
  443
  466
  489
Funds from operations, $m
  2,841
  3,694
  3,851
  4,014
  4,186
  4,366
  4,555
  4,753
  4,961
  5,178
  5,407
  5,311
  5,562
  5,826
  6,103
  6,394
  6,699
  7,020
  7,356
  7,709
  8,079
  8,468
  8,876
  9,304
  9,754
  10,226
  10,722
  11,243
  11,789
  12,363
  12,965
Change in working capital, $m
  28
  -69
  -72
  -76
  -79
  -83
  -87
  -91
  -96
  -101
  -105
  -111
  -116
  -122
  -128
  -134
  -141
  -148
  -155
  -163
  -171
  -179
  -188
  -198
  -208
  -218
  -229
  -240
  -252
  -265
  -278
Cash from operations, $m
  2,813
  3,763
  3,923
  4,090
  4,265
  4,449
  4,642
  4,844
  5,056
  5,279
  5,513
  5,421
  5,678
  5,948
  6,231
  6,528
  6,840
  7,167
  7,511
  7,871
  8,250
  8,647
  9,064
  9,502
  9,962
  10,444
  10,951
  11,483
  12,041
  12,627
  13,243
Maintenance CAPEX, $m
  0
  -111
  -117
  -123
  -129
  -136
  -143
  -150
  -158
  -166
  -174
  -183
  -193
  -202
  -212
  -223
  -234
  -246
  -259
  -272
  -285
  -300
  -315
  -331
  -347
  -365
  -383
  -402
  -422
  -443
  -466
New CAPEX, $m
  -920
  -180
  -182
  -190
  -200
  -209
  -219
  -230
  -241
  -253
  -266
  -279
  -292
  -307
  -322
  -338
  -355
  -372
  -391
  -410
  -430
  -452
  -474
  -498
  -523
  -549
  -576
  -605
  -635
  -667
  -700
Cash from investing activities, $m
  -805
  -291
  -299
  -313
  -329
  -345
  -362
  -380
  -399
  -419
  -440
  -462
  -485
  -509
  -534
  -561
  -589
  -618
  -650
  -682
  -715
  -752
  -789
  -829
  -870
  -914
  -959
  -1,007
  -1,057
  -1,110
  -1,166
Free cash flow, $m
  2,008
  3,472
  3,624
  3,777
  3,937
  4,104
  4,280
  4,464
  4,657
  4,860
  5,073
  4,959
  5,193
  5,439
  5,697
  5,967
  6,251
  6,549
  6,862
  7,190
  7,534
  7,896
  8,275
  8,674
  9,092
  9,531
  9,992
  10,476
  10,984
  11,517
  12,077
Issuance/(repayment) of debt, $m
  563
  1,058
  1,109
  1,163
  1,219
  1,278
  1,340
  1,405
  1,474
  1,546
  1,622
  1,702
  1,786
  1,874
  1,966
  2,063
  2,166
  2,273
  2,386
  2,504
  2,629
  2,759
  2,896
  3,041
  3,192
  3,351
  3,518
  3,693
  3,877
  4,071
  4,274
Issuance/(repurchase) of shares, $m
  -1,547
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,146
  1,058
  1,109
  1,163
  1,219
  1,278
  1,340
  1,405
  1,474
  1,546
  1,622
  1,702
  1,786
  1,874
  1,966
  2,063
  2,166
  2,273
  2,386
  2,504
  2,629
  2,759
  2,896
  3,041
  3,192
  3,351
  3,518
  3,693
  3,877
  4,071
  4,274
Total cash flow (excl. dividends), $m
  862
  4,529
  4,733
  4,939
  5,155
  5,382
  5,620
  5,869
  6,131
  6,406
  6,695
  6,661
  6,979
  7,313
  7,663
  8,031
  8,417
  8,822
  9,247
  9,694
  10,163
  10,655
  11,172
  11,714
  12,284
  12,882
  13,510
  14,169
  14,861
  15,588
  16,351
Retained Cash Flow (-), $m
  263
  -147
  -148
  -156
  -163
  -171
  -179
  -188
  -197
  -207
  -217
  -228
  -239
  -251
  -263
  -276
  -290
  -304
  -319
  -335
  -352
  -369
  -387
  -407
  -427
  -448
  -471
  -494
  -519
  -545
  -572
Prev. year cash balance distribution, $m
 
  2,541
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  6,924
  4,585
  4,784
  4,992
  5,211
  5,440
  5,681
  5,934
  6,199
  6,478
  6,434
  6,740
  7,062
  7,400
  7,755
  8,127
  8,518
  8,928
  9,359
  9,811
  10,286
  10,784
  11,307
  11,857
  12,434
  13,039
  13,675
  14,342
  15,043
  15,779
Discount rate, %
 
  4.70
  4.94
  5.18
  5.44
  5.71
  6.00
  6.30
  6.61
  6.94
  7.29
  7.66
  8.04
  8.44
  8.86
  9.31
  9.77
  10.26
  10.77
  11.31
  11.88
  12.47
  13.09
  13.75
  14.44
  15.16
  15.92
  16.71
  17.55
  18.42
  19.35
PV of cash for distribution, $m
 
  6,613
  4,164
  4,111
  4,039
  3,947
  3,836
  3,705
  3,555
  3,388
  3,205
  2,858
  2,665
  2,463
  2,254
  2,041
  1,829
  1,619
  1,416
  1,222
  1,040
  872
  720
  584
  466
  365
  280
  211
  155
  112
  78
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Northrop Grumman Corporation, a security company, provides systems, products, and solutions to government and commercial customers in the areas of aerospace, mission systems, and technology services worldwide. Its Aerospace Systems segment designs, develops, integrates, and produces manned aircraft, autonomous systems, spacecraft, high-energy laser systems, microelectronics, and other systems/subsystems. This segment sells its products primarily to Department of Defense (DoD) and other government agencies for use in various areas, including intelligence, surveillance, and reconnaissance; strike operations; communications; earth observation; and space science and exploration. The company’s Mission Systems segment provides mission solutions and multifunction systems, including C4ISR systems; radar, electro-optical/infrared, and acoustic sensors; electronic warfare systems; cyber solutions; space systems; intelligence processing systems; air and missile defense integration; navigation; and shipboard missile and encapsulated payload launch systems for DoD, intelligence community, international, federal, civil, and commercial customers. Its Technology Services segment provides software and system sustainment, advanced training, and integrated logistics support solutions, as well as engages in modernization of platforms and associated subsystems. The company was founded in 1939 and is based in Falls Church, Virginia.

FINANCIAL RATIOS  of  Northrop Grumman (NOC)

Valuation Ratios
P/E Ratio 21.7
Price to Sales 1.9
Price to Book 9.1
Price to Tangible Book
Price to Cash Flow 17
Price to Free Cash Flow 25.2
Growth Rates
Sales Growth Rate 4.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 95.3%
Cap. Spend. - 3 Yr. Gr. Rate 20.4%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 134.2%
Total Debt to Equity 134.2%
Interest Coverage 0
Management Effectiveness
Return On Assets 8.8%
Ret/ On Assets - 3 Yr. Avg. 8.1%
Return On Total Capital 18.2%
Ret/ On T. Cap. - 3 Yr. Avg. 16%
Return On Equity 40.8%
Return On Equity - 3 Yr. Avg. 31.7%
Asset Turnover 1
Profitability Ratios
Gross Margin 23.6%
Gross Margin - 3 Yr. Avg. 23.6%
EBITDA Margin 13.8%
EBITDA Margin - 3 Yr. Avg. 13.9%
Operating Margin 13%
Oper. Margin - 3 Yr. Avg. 13.1%
Pre-Tax Margin 11.9%
Pre-Tax Margin - 3 Yr. Avg. 12%
Net Profit Margin 9%
Net Profit Margin - 3 Yr. Avg. 8.7%
Effective Tax Rate 24.7%
Eff/ Tax Rate - 3 Yr. Avg. 27.7%
Payout Ratio 29.1%

NOC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the NOC stock intrinsic value calculation we used $24508 million for the last fiscal year's total revenue generated by Northrop Grumman. The default revenue input number comes from 2016 income statement of Northrop Grumman. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our NOC stock valuation model: a) initial revenue growth rate of 5.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.7%, whose default value for NOC is calculated based on our internal credit rating of Northrop Grumman, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Northrop Grumman.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of NOC stock the variable cost ratio is equal to 86.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for NOC stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Northrop Grumman.

Corporate tax rate of 27% is the nominal tax rate for Northrop Grumman. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the NOC stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for NOC are equal to 13.6%.

Life of production assets of 34.6 years is the average useful life of capital assets used in Northrop Grumman operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for NOC is equal to -5.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $5259 million for Northrop Grumman - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 173.545 million for Northrop Grumman is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Northrop Grumman at the current share price and the inputted number of shares is $47.3 billion.

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COMPANY NEWS

▶ Air Force drops Lockheed Martin from nuclear missile overhaul bidding   [03:45PM  American City Business Journals]
▶ Boeing, Northrop get contracts for nuclear missile work   [Aug-21-17 08:15PM  Associated Press]
▶ Lockheed Martin, SpaceX, Moon Express to hire 800-plus for high-tech jobs   [Aug-17-17 05:35PM  American City Business Journals]
▶ Northrop Grumman Board Declares Quarterly Dividend   [Aug-16-17 05:45PM  GlobeNewswire]
▶ What's working: Defense stocks   [06:51AM  CNBC Videos]
▶ Defense names in the blitz   [01:44PM  CNBC Videos]
▶ Five IQ100 members hit new highs   [01:29PM  CNBC Videos]
▶ Raytheon's market cap soars past $50B on defense sector strength   [02:12PM  American City Business Journals]
▶ Lockheed, Northrop, DRS land 6 contracts with $4.1B in local work   [03:50PM  American City Business Journals]
▶ Be Careful With Whom You Connect on Social Media   [Jul-29-17 12:55PM  Fortune]
▶ Northrop Grumman beats Street 2Q forecasts   [Jul-26-17 05:00PM  Associated Press]
▶ 2 Defense Giants Boost Views After Strong Earnings   [04:25PM  Investor's Business Daily]
▶ Better Buy: Raytheon Company vs. Northrop Grumman   [Jul-25-17 07:41PM  Motley Fool]
▶ 3 Drone Companies to Invest in Today   [09:20AM  Motley Fool]
▶ Moodys: DOJ investigation into Booz Allen 'could take years to resolve   [Jul-17-17 04:15PM  American City Business Journals]
▶ GoPro Inc (GPRO): The Dark Side of Moores Law   [Jul-16-17 09:30AM  InvestorPlace]
▶ Lockheed Earnings Preview: F-35 Costs, Missile-Defense Sales In Focus   [Jul-15-17 09:52AM  Investor's Business Daily]
▶ Put Lockheed Martin Corporation (LMT) Stock on Your Radar!   [Jul-07-17 11:18AM  InvestorPlace]
▶ North Korea defense sector impact   [02:15PM  CNBC Videos]
  [Jul-02-17 08:08PM  Bloomberg Video]
Financial statements of NOC
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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